SanomaWSOY's Interim Report 1 January - 30 June 2005
SanomaWSOY's operating profit developed well and improved in January - June by 16.5%, to EUR 138.1 (118.6) million. Earnings per share increased to EUR 0.57 (0.54). In the second quarter, net sales totalled EUR 667.5 (601.5) million and operating profit was EUR 89.2 (73.5) million.
Outlook for 2005
Estimates on European economic growth in 2005 have been revised slightly downwards. Research institutes now estimate that GDP will grow in the Netherlands only by 0.5%, in Belgium by some 1.5%, and in Finland by some 2.5%. Growth in Hungary is estimated to be slightly over 3%, in the Czech Republic over 4%, and in Russia almost 6%. Media advertising traditionally reacts quickly to the development of GDP.
SanomaWSOY's net sales are expected to grow by some 6% in 2005. The operating profit excluding non-recurring gains on the sales of assets is expected to be at least at the previous year's good level. In 2004, operating profit excluding the most substantial non-recurring gains on the sales of assets was EUR 268.2 million.
Targets and Key Events
International expansion of the SanomaWSOY Group continued in the first half of 2005. Independent Media Holding, Russia's leading magazine publisher, was consolidated with Sanoma Magazines International at the beginning of March when the necessary approvals for the deal were received. In May, Rautakirja acquired the kiosk chain Lietuvos Spauda, which is the market leader in Lithuania. The deal is subject to the approval of the Lithuanian competition authorities. In June, Pressexpo, a distribution company owned by Independent Media was transferred to Rautakirja's ownership. The deal is subject to the approval of the Russian competition authorities. The units for press distribution in Romania and Lithuania were consolidated with Rautakirja during the first half of the year, and Sanoma Magazines began operating in Serbia and Montenegro in February.
Further investments were made in developing business and strengthening market positions. WSOY continued to share best practices and make use of synergy benefits in its new educational publishing business. SWelcom invested in TV channel Nelonen's programmes in particular. The Sanoma Kaupunkilehdet business unit for free sheets developed further, due to new distribution agreements and launches, among others. SanomaWSOY entered into the radio business when the competition authorities approved in May the purchase of Radio Helsinki's business operations by Helsingin Sanomat.
The Group also continued to focus on its core businesses. Rautakirja divested its restaurant operations in January, and Sanoma Lehtimedia sold the operations of Etelä-Karjalan Jakelu, a newspaper delivery business, to Finland Post in June. The deal will be effective as of 1 September 2005.
Profitability, internationalisation, growth, and development are SanomaWSOY's key strategic objectives. According to the financial targets published in May, SanomaWSOY's strategic target is to increase net sales faster than the growth of GDP in the main operating countries. The Group's strategic operating profit target is 12%. The target is based on the assumption that the development of the operational environment remains stable. SanomaWSOY began reporting in accordance with international IFRS standards as of 1 January 2005.
In January - June, SanomaWSOY's net sales grew by 6.8% and totalled EUR 1,249.6 (1,170.1) million. After adjustment for changes in Group structure, net sales increased by 1.8%. Advertising sales represented 22% (21%) of the Group's total net sales.
SanomaWSOY's result developed well. In the review period, operating profit increased by 16.5%, totalling EUR 138.1 (118.6) million. Operating profit was 11.1% (10.1%) of net sales. Result improved especially due to the new educational publishing operations of WSOY Division and a good performance by the Sanoma Division's Helsingin Sanomat. The most substantial non-recurring gains on the sales of assets amounted to EUR 4.0 (2.4) million. Operating profit excluding these gains grew by 15.5%.
The Group's net financial items totalled EUR -14.8 (-5.8) million. Financial income amounted to EUR 5.0 (15.5) million. In 2004, SanomaWSOY divested its share portfolio. There was no corresponding financial income in the review period. Financial expenses were EUR 19.8 (21.3) million and consisted mainly of interest expenses totalling EUR 16.6 (16.6) million.
Result before taxes grew to EUR 129.1 (117.2) million. Earnings per share increased to EUR 0.57 (0.54).
The impact of seasonal educational publishing increased after the acquisition in July 2004 and it continued to affect cash flow. In January - June, cash flow from operations totalled EUR 56.7 (85.5) million. Cash flow from operations per share was EUR 0.37 (0.56).
Balance Sheet and Financial Position
At the end of June, the consolidated balance sheet totalled EUR 2,931.1 (2,431.0) million. SanomaWSOY's equity ratio was 34.3% (37.7%) and gearing 115.9% (88.3%). The equity amounted to EUR 949.1 (864.0) million. Investments were financed by existing credit facilities. Interest-bearing liabilities grew to EUR 1,161.2 (824.7) million, mainly due to acquisitions in January - June, and net debt increased to EUR 1,099.8 (762.5) million. The Group's liquidities totalled EUR 61.4 (62.2) million at the end of June.
The conversion of convertible capital notes into Series B shares after the review period improved the Group's equity ratio by some one percentage point.
SanomaWSOY invested EUR 276.2 (44.8) million in January - June. The largest investments were Sanoma Magazines' acquisition of Independent Media and the transfer of JHC Arena Holding and its multi-purpose arena in Hamburg to Rautakirja's ownership. EUR 154.7 million was recorded as an investment in Independent Media. Investment in the multi-purpose arena in Hamburg increased Rautakirja's balance sheet by EUR 76.5 million. R&D expenditure recorded as expenses amounted to EUR 8.8 (6.5) million.
Media advertising in Finland increased in January - June by 4% according to TNS Gallup Adex. Newspaper advertising grew by 6% and job advertising by 17%. Advertising in magazines increased by 4% and on television by 0.4%. According to advance information, magazine advertising remained at the previous year's level in the Netherlands and Belgium. However, its share in media advertising continued to decrease. Consumer confidence in the development of own economy remained high in Finland but was poor in the Netherlands and Belgium. The Finnish Food Marketing Association reported a slight decrease in retail trade in Finland in January - May.
The labour dispute of Finnish paper industry in May - June had no significant impact on SanomaWSOY. All newspapers, magazines, and books were published according to plan.
SanomaWSOY's Annual General Meeting of 12 April 2005 re-elected Robert Castrén, Jane Erkko, Paavo Hohti, and Robin Langenskiöld as members of the Board. Chairman Jaakko Rauramo, Sari Baldauf, who was elected as Vice Chairman, and members Sirkka Hämäläinen, Seppo Kievari, Hannu Syrjänen, and Sakari Tamminen continued on the Board.
In line with the decision of the AGM, SanomaWSOY distributed a dividend of EUR 0.80 (1.00) per share for 2004, totalling EUR 122.5 million. The record date for dividend payment was 15 April 2005 and the dividend was paid on 22 April 2005.
Trading with SanomaWSOY shares increased significantly in January - June, with a turnover of EUR 953.2 (219.1) million. Most of the shares traded, or some 49 million, were Series B. In March, the principal shareholders of SanomaWSOY, Aatos Erkko and the estate of Patricia Seppälä, sold a total of 10 million Series B shares, which improved the liquidity of the share considerably. In the review period, the average price of Series A shares was EUR 19.54 with a low of EUR 16.85 and a high of EUR 22.70. Series B shares were traded at an average price of EUR 19.30, varying between EUR 17.07 and EUR 20.90. SanomaWSOY's market capitalisation at the end of June was EUR 3,109.9 (2,352,4) million. The Company did not hold any of its own shares.
The conversion period of SanomaWSOY's convertible capital note began on 2 January 2002. The conversion price is EUR 15.91. SanomaWSOY has redeemed and invalidated a total of 4,944 debentures. Redeemed debentures are invalidated every six months.
In January - June, a total of 30 debentures were converted into 18,855 Series B shares. After the conversions, the loan totalled EUR 150.3 million. In addition, a total of 72,180 Series A shares were converted into Series B shares. At the end of June, SanomaWSOY's share capital was EUR 65,846,333.01. The number of Series B shares on the market was 130,003,695 and the number of Series A shares was 23,127,312.
After the review period, a total of 2,926 debentures were converted into 1,839,106 Series B shares. The increase of share capital was entered into the Trade Register on 22 July 2005 and the trading with the new shares began on 25 July 2005. Following the conversion, SanomaWSOY's share capital amounted to EUR 66,637,148.59 and the number of Series B shares grew to 131,842,801. The number of Series A shares remained at 23,127,312. After these conversions, the convertible capital note totalled EUR 121.0 million.
Authorisations of the Board
The AGM of 12 April 2005 authorised SanomaWSOY's Board to decide, within one year of the AGM, on an increase of share capital by one or more rights issues, issuance of one or more convertible bonds loans and/or option rights. The new shares issued shall be of Series B, and their aggregate number may not exceed 30,622,430 shares. The total increase of share capital may not exceed EUR 13,167,644.90. The authorisation excludes the personnel incentives.
The AGM also authorised the Board to decide, within one year of the AGM, to acquire the Company's own Series A and B shares. The acquisition will be made by using distributable funds. The aggregate book counter-value of the shares or the total votes conferred by such shares after the acquisition may not exceed 5% of the share capital or of the total votes of the Company. The shares will be acquired in the existing proportion of the different share classes.
The Board did not exercise the authorisations in the January - June period.
SanomaWSOY began reporting in accordance with international IFRS standards as of 1 January 2005. Further information on the impact of the new accounting principles is given in the Stock Exchange Release published by the Group on 27 April 2005. The release is available at www.sanomawsoy.fi. The first Financial Statements according to the IFRS will be published for 2005.
About one fifth of SanomaWSOY's net sales are derived from advertising sales. Media advertising reacts quickly to changes in economic cycles. Development in media advertising has an impact on the net sales and result of Sanoma Magazines, Sanoma, and SWelcom. Advertising sales are influenced, among other things, by the number of newspaper and magazine issues published during each quarter, which varies yearly. TV advertising in Finland is usually strongest in the second and fourth quarters.
A major part of net sales and result in publishing and trade, among others, is accrued in the last quarter, particularly from Christmas sales. Also media advertising increases before Christmas. In educational publishing, net sales and result are mainly generated in the second and third quarters. Seasonal fluctuation in publishing also has an impact on printing.
SanomaWSOY operates in 20 European countries, across a wide variety of media sectors. Thus the Group's result is not heavily dependent on the development of any specific business unit. Nevertheless, seasonal fluctuation in businesses influences net sales and operating profit, and traditionally makes the first quarter the weakest and the last the strongest.
Magazine publishing and distribution. Sanoma Magazines is one of Europe' five largest magazine publishers. The Division publishes 278 titles in 12 countries: Belgium, Bulgaria, Croatia, the Czech Republic, Finland, Hungary, the Netherlands, Romania, Russia, Serbia and Montenegro, Slovakia, and Ukraine. Aldipress is the leading magazine distributor in the Netherlands.
In January - June, Sanoma Magazines' net sales grew to EUR 555.3 (526.2) million. Net sales at Sanoma Uitgevers totalled EUR 252.5 (249.6) million. Sanoma Magazines International's net sales grew in almost all countries in which it operates, totalling EUR 92.8 (67.5) million. Independent Media, with operations in Russia and Ukraine, was consolidated with Sanoma Magazines International as of 1 March 2005. Sanoma Magazines Belgium's net sales decreased to EUR 93.3 (97.1) million and Sanoma Magazines Finland's increased to EUR 87.9 (86.1) million. Net sales at Aldipress grew to EUR 57.8 (54.9) million. After adjustment for changes in Group structure, the Division's net sales increased by 1.5%.
Sanoma Magazines' advertising sales increased by 14% in January - June, due mainly to the new operations and accounted for 22% (20%) of the Division's total net sales. Despite the weak consumer spending trends in the Dutch market, Sanoma Uitgevers' advertising sales were at the previous year's level. The advertising sales in most of Sanoma Magazines International's countries developed well. Sales in the Czech Republic decreased due to continuing intense competition. In Sanoma Magazines Belgium, special formulas were successful. The advertising sales of some magazines decreased in Sanoma Magazines Finland.
The Division's circulation sales grew by 4% and represented 57% (58%) of total net sales. Circulation sales remained stable at Sanoma Uitgevers despite the strong competition. Circulation sales in Sanoma Magazines International increased in all countries with the exception of the Czech Republic where sales were stable, despite the difficult market situation and reduced consumer spending. Sanoma Magazines Belgium's circulation sales were at the previous year's level. Circulation sales in Sanoma Magazines Finland grew.
Sanoma Magazines' operating profit decreased to EUR 65.8 (68.6) million. In 2004, the Division's operating profit included a EUR 2.4 million non-recurring gain on the sale of Milvus Förlags. Sanoma Uitgevers' result decreased slightly. Operating profit at Sanoma Magazines International grew a little, mainly due to the new operations. Sanoma Magazines Belgium's result improved due to lower operational costs and timing differences. Sanoma Magazines Finland's operating profit decreased. Aldipress' result remained almost stable despite a decrease in the number of distributed single copies.
Sanoma Uitgevers' President changed and Ms Christina von Wackerbarth was appointed President (acting) as of 8 June 2005.
In 2005, Sanoma Magazines' net sales are estimated to grow. Operating profit including Independent Media is expected to remain to some extent below that of 2004 due to continuing investments in future growth and expansion into new markets. In addition, it is uncertain what is happening in the Dutch magazine advertising market.
Newspaper publishing and printing. Sanoma publishes and prints Finland's leading newspapers, Helsingin Sanomat and Ilta-Sanomat. Sanoma's titles also include the dailies Etelä-Saimaa, Kymen Sanomat, and Kouvolan Sanomat among others, the business daily Taloussanomat, the free sheet Uutislehti 100, the sports and betting weekly IS Veikkaaja, the free-ad publication Keltainen Pörssi as well as free sheets and local papers in Southern Finland.
Sanoma's net sales increased to EUR 223.0 (213.7) million in the first half of the year. Helsingin Sanomat was particularly successful, its net sales increased to EUR 130.8 (126.1) million, due to increased advertising and circulation sales. Ilta-Sanomat's (previously: IS Business Unit) net sales amounted to EUR 46.3 (47.0) million. Sanoma Lehtimedia's net sales grew to EUR 24.4 (23.4) million, influenced mainly by advertising sales.
Advertising sales grew by 8% in the first half of 2005 and accounted for 51% (49%) of Sanoma's net sales. Advertising sales grew in all business units. In the second quarter, Sanoma's advertising sales increased by 7%. Job advertising in Helsingin Sanomat grew by 13% in January - June. The new Sanoma Kaupunkilehdet business unit for free sheets accounted for a third of the increase in Sanoma's advertising sales.
Sanoma's circulation sales reached the previous year's level and accounted for 42% (43%) of net sales. Helsingin Sanomat's circulation decreased slightly, as did that of Ilta-Sanomat, whose market share among tabloids was 60.5% (61.9%). Taloussanomat and Etelä-Saimaa increased their circulation.
Sanoma's operating profit grew to EUR 30.5 (24.4) million, particularly due to increased advertising sales. Operating profit improved especially in Helsingin Sanomat.
The Sanoma Kaupunkilehdet business unit's market position improved significantly. In April, the free sheet Kaupunkilehti Kymppi was introduced in Eastern Helsinki, and agreements were signed for the distribution of Uutislehti 100 in around 600 buses as well as trams and metro stations in Helsinki. In June, the Finnish operations of the Nöjesguiden sheet were acquired. The business will be transferred to Sanoma as of 1 September 2005.
Helsingin Sanomat strengthened its local position and cross media strategy by acquiring Radio Helsinki. The deal was finalised in May. In June, Sanoma Lehtimedia sold the business operations of Etelä-Karjalan Jakelu Oy to Finland Post. The deal will be effective as of 1 September 2005. After the review period, Keltainen Pörssi became the largest service for classified ads in Finland as Ilta-Sanomat acquired online auction service Huuto.net.
Growth in media advertising is expected to continue in the second half of 2005 slightly slower than in the first half of this year. Sanoma's advertising sales are expected to grow at least in line with this general trend. The Division's net sales are expected to grow. Comparable operating profit is estimated to be at least at the previous year's level.
Educational publishing, publishing, printing, and diaries. WSOY is Finland's largest book publisher and a significant European educational publisher. WSOY is also one of the largest book printers and the leading diary publisher in the Nordic region.
WSOY's net sales grew to EUR 142.2 (91.4) million, particularly due to greater demand for books in the second quarter and the acquisition of Malmberg Investments in July 2004. Following the acquisition, WSOY's educational publishing units in Finland, the Netherlands, Belgium, and Poland, were reorganised under a new educational publishing business. Previously, educational publishing was reported as part of publishing. After adjustment for changes in Group structure, net sales grew by 1.0%.
Net sales in educational publishing grew to EUR 74.1 (22.8) million, mainly due to operations in the Netherlands and Belgium. Sales developed well in Finland, too. Growth was partly due to deliveries being made already in the second quarter. Integration between the educational units in different countries continued.
Net sales in publishing increased to EUR 43.3 (42.6) million. General literature, particularly children's and juvenile books, as well as translated fiction, continued to sell well, as did business-to-business books and multi-volume books. In 2004, Finnish publishers began publishing new titles also for the summer season. This has increased sales. Sales to bookstores and other dealers grew by almost 20% in January - June. Sales through book clubs fell due to a decrease in membership.
Net sales in printing totalled EUR 27.6 (28.8) million. The digital printer Dark continued to grow. Sales of the book printer WS Bookwell suffered from repair work at the Juva site. Sävypaino is part of Lönnberg Painot Oy specialising in printing of advertising materials. Sävypaino's operations will be consolidated with the F.G. Lönnberg unit in order to improve its service range and competitive position.
Net sales in diaries amounted to EUR 3.2 (3.5) million. Transfer of production operations from Norway to Finland and Estonia is estimated to improve profitability significantly in 2005.
WSOY's operating profit grew to EUR 21.0 (6.8) million. Growth was particularly generated by new educational publishing operations.
WSOY's net sales and operating profit for 2005 are expected to grow significantly, due to the international expansion of educational publishing, among others. The development is also expected to be positive in the other businesses.
Electronic media. SWelcom's unit, TV channel Nelonen, is Finland's third most important advertising medium. HTV (Helsinki Television) is the country's largest cable TV company.
SWelcom's net sales grew to EUR 60.9 (59.3) million in January - June. After adjustment for changes in Group structure, net sales grew by 4.2%. Figures for the comparable period included Måndag, sold in April 2004. Advertising sales totalled 59% (58%) of SWelcom's net sales.
Nelonen's net sales increased to EUR 36.1 (34.1) million. In January - June, the channel's share in TV advertising grew to more than 31%. In June, Nelonen reached its all time high market share, 34.8%. Its share of commercial viewing amongst the most important target group for advertising sales (women aged 25 - 44) increased to 32.5% (30.2%) in the second quarter. The target group was especially attracted by Finnish versions of the reality TV programmes Queer Eye for the Straight Guy and Under Construction. Nelonen's investments in programmes for the autumn are significant, and are expected to increase both viewing and market shares.
The number of HTV's pay TV and broadband subscribers increased in January - June. Despite growing subscriptions, net sales decreased slightly since price competition in the consumer market for broadband services grew stronger and the number of new households connected to the cable network returned to normal level after the record years of 2002 - 2004.
SWelcom's operating profit grew to EUR 4.8 (4.3) million due to good development at Nelonen. Growth in operating profit was weakened by the decreasing prices for broadband services.
In June, SWelcom announced the consolidation of its TV operations, i.e. Nelonen, HTV, and Werne, into one company as of 1 January 2006. This merger will simplify SWelcom's structure and improve efficiency. It will also improve SWelcom's ability to respond to the challenges of integrating electronic communications.
In 2005, SWelcom's net sales are expected to grow. SWelcom's result is influenced, in addition to Nelonen's advertising sales, by increased price competition in broadband services. Operating profit is estimated to remain at the previous year's level.
Kiosk operations, press distribution, bookstores, and entertainment. Rautakirja is the market leader in kiosk operations, press distribution, and movie theatres in Finland and the Baltic countries. In addition, it is the market leader in bookstores in Finland. Press distribution has extended to Romania and Russia, and kiosk operations to the Czech Republic.
Rautakirja's net sales totalled EUR 293.0 (305.0) million in the first half of the year. Net sales decreased in Finland as Rautakirja divested its restaurant operations and sold its highway service area operations to Neste Marketing in December 2004. Also, net sales from kiosk operations, press distribution, and movie theatres declined slightly in Finland. Net sales increased in its other countries. Finland accounted for 84% (90%) of net sales. After adjustment for changes in Group structure, the Division's net sales remained at the previous year's level.
Kiosk operations generated net sales of EUR 168.5 (170.2) million. Net sales declined in Finland due to beer price competition in the retail trade and decreased lottery sales, while sales of sweets and cigarettes increased. In Finland, the introduction of a new cash register system continued. This system enables the sales of new products and services in R-kiosks from this and next year onwards. Rautakirja signed a cooperation agreement with TeliaSonera on sales of electronic talk time, and with VR on sales of train tickets. In other countries, net sales increased in kiosk operations.
Net sales from press distribution grew to EUR 47.1 (39.6) million, mainly due to new operations in Lithuania and Romania. Net sales grew in Estonia and Latvia but declined slightly in Finland. Sales of magazines developed favourably in Finland but sales of newspapers declined slightly.
Net sales from bookstores grew to EUR 50.5 (48.4) million. Net sales grew both in Finland and in Estonia. Sales of paperbacks, fiction, and non-fiction were particularly successful. New outlets were opened in the second quarter in the Kamppi Business Centre in Helsinki and Koskikeskus in Tampere, and in the Kristiine Centre in Tallinn.
The entertainment business comprises movie theatres in Finland and the Baltic countries, and a multi-purpose arena in Hamburg, which was transferred to Rautakirja's ownership in February 2005. Net sales grew to EUR 29.8 (26.1) million due to new operations. Movie theatres' net sales fell slightly in all countries in which Rautakirja operates due to supply: movies experienced their weakest six months for almost 20 years all over the world. However, Finnkino increased its market share in Finland.
Net sales from other operations totalled EUR 2.6 (26.4) million. Highway service areas were included in net sales in January only, whereas in the previous year, they were part of Rautakirja for the full year.
Rautakirja's operating profit grew to EUR 17.8 (15.5) million as a result of the gain on the sale of restaurant operations. Rautakirja's most significant non-recurring gains on the sales of assets amounted to EUR 4.0 (0.0) million in January - June. Operating profit grew in press distribution but declined in kiosk operations and entertainment. Operating profit from bookstores remained at the previous year's level.
In May, Rautakirja acquired Lietuvos Spauda, a Lithuanian kiosk chain with 540 outlets and net sales of about EUR 17 million in 2004. In June, Rautakirja expanded to Russia by acquiring the press distribution company TK Pressexpo. Pressexpo has a 15% share in modern newsstand sales of papers in the Moscow region. The acquisitions are subject to the approval of the respective competition authorities.
Competition will continue to be intense in 2005 in retail but Rautakirja's heavy investments in business concepts, personnel, and ICT development as well as in acquisitions will also secure success during this year. Comparable net sales are expected to grow, particularly outside Finland. Comparable operating profit is expected to improve.
Helsinki, 4 August 2005
Board of Directors
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